Partners in Change

Responsible banking

Banks have an instrumental role to play in ensuring that economic development does not come at the cost of people and the environment. Within the regulatory and operational constraints of the Indian context, they remain co-architects of the wider ecosystem in which businesses, large and small, operate. Banks can invest, and help to enable investment in, certain areas of the economy which need it most, such as agriculture, education, and health. They can promote equitable access to credit through schemes accessible to those who might otherwise be considered ‘unbankable’. In their appraisal of loans, and in their investment decisions, banks also have responsibility to assess risks. These risks, if not properly assessed and managed, have the potential to impact much more than just the banks’ core business.

On December 20, 2007, the Reserve Bank of India released a notification[1] on the responsibility of financial institutions towards sustainable development, CSR and Non-Financial Reporting (NFR). It stated:

“The contribution of financial institutions including banks to sustainable development is paramount, considering the crucial role they play in financing the economic and developmental activities of the world. In this context, the urgency for banks to act as responsible corporate citizens in the society, especially in a developing country like ours, need be hardly overemphasized. Their activities should reflect their concern for human rights and environment.”

(Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting – Role of Banks)

Reflecting on the issues at stake, including climate change and global warming, the RBI further advises Banks to acknowledge “the issues raised and consider using the same to put in place a suitable and appropriate plan of action towards helping the cause of sustainable development…” Today, it is clear that the scope of responsible banking can be taken to incorporate all the different domains of a bank’s activity, such as lending, investing, other activities and responsibilities connected to the overall functioning of the institution. Secondly, in terms of legal and ethical commitments, responsible banking can mean a number of different things.

PiC’s recent work on responsible business started with a critical analysis of the SEBI-mandated BRR reports. As part of its first set of analysis, the BRRs across 100 companies were reviewed and analysed. The companies were ranked in terms of their commitment to disclose policies on the nine principles and also the quality of disclosure. As an outcome of this process, PiC developed a manual for companies to keep in mind while making disclosures.

In 2015, PiC co-created the India Responsible Business Index[2], which critically assessed disclosures of top 100 companies in India, following the 2012 mandate from SEBI that companies disclose their reports according to the BRR format. The Index, which is in line with the National Voluntary Guidelines on the Social, Economic and Environmental Responsibilities of Businesses (NVGs), focuses on company policies around matters of social inclusion and social equity.

Our experience of analysing BRRs shows that many banks do not feel that the reporting framework applies directly to them. This is because the BRR framework was designed for businesses in general, and not banks and Financial Institutions (FIs) in particular. However, close analysis of the NVGs, on which the BRRs were based, indicates that they have significant implications for how banks function. Whilst the primary focus of the NVGs is on businesses’ internal policies, businesses transparent “communication” and “promotion” of responsible policy and practice is also important, as is their responsibility for “third party”[3] activities.

Still, the NVGs, like the BRRs, are not sector specific. Specific expectations of banks and FIs are present in numerous international guidelines, such as the UN Principles on Responsible Investment, the UN Global Compact and the Equator Principles. Some of these guidelines been signed by some of our leading financial institutions, such as IDFC, HDFC and YES Bank.

A review of international efforts towards responsible banking locates initiatives such as the Fair Finance Guide (FFG). The FFG brings together a holistic set of international benchmarks of responsible finance, including the Equator Principles, the UN Global Compact and the Global Reporting Initiative. The objective of the FFG is to encourage Corporate Social Responsibility (in its full sense, as suggested by RBI) by financial institutions. This means they not only adhere to legislation and regulation in the countries where they operate, but also comply with widely supported international standards – even where these are not included in local legislation. Inviting banks and their customers to insist on responsibility with robust and clear policies, the FFG has dialogued productively with banks across a diversity of issues relating to companies they invest in: from human rights, to the environment, to arms.

The question the FFG raises is to what extent financial institutions support, through their financial services, activities that contribute to a socially just and sustainable world. The objective of the FFG is to encourage financial institutions to not only adhere to domestic legislation and regulation, but also meet the latest international standards. The FFG believes that financial institutions should record their expectations of their clients and investees and make them publicly known in their policies. Prompted by the fair finance guide, many banks have taken steps towards more enlightened policies that take account of the impacts of what they finance on society and the environment. These policies have in turn won greater consumer confidence.

Our current initiative

Partners in Change is currently leading an effort to assess the appetite for responsible banking in India. Our study includes, broadly:

Piloting studies of three Indian banks, using the FFG as an instrument

Analysing their disclosures against the NVGs

Assessing what responsible banking means to stakeholders in the Indian context, and comparing it with existing national and international benchmarks

Gauging interest in responsible banking in India

Beginning conversations with interested organisations from the financial sector, industry and the third sector

We would welcome the opportunity to discuss this initiative with you, to get your perspectives on whether you think an initiative of this sort could work in India; and, if so, under what conditions. For more information, please contact: rohan [at] picindia.org or reena [at] picindia.org